How Hungary Eliminated Foreign Exchange Loans and Averted a Crisis

Parallel to the Greek sovereign debt crisis, another debt crisis has threatened the EU. The Swiss National Bank’s decision in January 2015 to abandon the exchange-rate cap against the euro, sending shock waves through several central European countries. Following the decision, the value of the Swiss franc jumped, trading on average at a rate 20 percent higher against central European currencies. The dramatic increase shook the mortgage markets, touching hundreds of thousands of families in the region.

Parallel to the Greek sovereign debt crisis, another debt crisis has threatened the EU. The Swiss National Bank’s decision in January 2015 to abandon the exchange-rate cap against the euro, sending shock waves through several central European countries. Following the decision, the value of the Swiss franc jumped, trading on average at a rate 20 percent higher against central European currencies. The dramatic increase shook the mortgage markets, touching hundreds of thousands of families in the region.

At the time, Poland had approximately 550,000 mortgages denominated in Swiss francs, amounting to some 30 billion euro or 7.7 percent of Polish GDP. In Austria, borrowers owed 25 billion euro in Swiss franc mortgages, equal to about 7 percent of the country’s GDP. Around the region, Romania had 150,000 Swiss franc mortgages, Croatia held 60,000 and Serbia 20,000. The sudden spike in the value of the Swiss franc meant that monthly payments on these loans increased by an average of 20 percent, pushing borrowing households to the financial edge. Many of these countries are still struggling to find a way out.

Though once saddled with an enormous foreign-currency debt far greater than its CEE neighbors, Hungary followed a different path. In 2010, Hungarian household debt was approaching 10.6 trillion HUF, or approximately 40 percent of GDP. Two-thirds of that was in foreign currency-denominated loans, reaching 7.3 trillion HUF, or about 28 percent of GDP. Over 90 percent of foreign currency debt was denominated in Swiss francs and approximately 7 percent in euros.

By 2015, foreign currency loans had fallen to only 2 percent of GDP and by 2016 were nearly eliminated. The loans were phased out just before Switzerland lifted the exchange rate cap, preventing what would have been a sudden 700 billion-HUF spike in household debt. Hungary averted the disaster thanks to a set of bold policy and legislative measures, once considered “unorthodox,” to phase out foreign-currency loans entirely from the debt market.

Mandatory reimbursements and the elimination of FX mortgages in Hungary

The Hungarian government set its sights on the foreign-currency loans immediately after taking office in 2010 and soon introduced several measures to ease the burden of the borrowers and stabilize the mortgage market. Already in July of that year, the Hungarian Parliament voted to temporarily ban the provision of foreign exchange loans with mortgage collateral. The purpose of the ban was to prevent the further indebting of the population and to decrease the likelihood of them losing their homes (the ban was lifted in June 2011 to comply with EU regulations). Also in 2010, the government set in place a moratorium on evictions, introduced the option of early pay-back of the loans under favorable terms, and also presented the possibility of freezing the monthly payments at a lower level for a temporary period.

The first, major reduction in the foreign currency loans occurred during a five month period from the end of September 2011 to the end of February 2012 when the government allowed debtors to settle their accounts at a predetermined interest rate. Some 170,000 loan holders repaid their debts with the help of this program.

In 2014, the Hungarian Parliament adopted a law requiring banks to reimburse borrowers for fees and surcharges levied during the lending period that were deemed to be unfair. Based on the law, banks were required to pay back about 1 trillion HUF to more than 1.3 million Hungarian families in the spring of 2015. Those families who had already repaid their loans received a cash payment in 2015. Those who were still paying on a loan had the principal on the loan reduced by the corresponding amount. Estimates at the time indicated that the reductions in principal cut monthly loan payments by about 25 to 30 percent, on average.

Later the same year, Parliament adopted a law that obliged all banks to convert foreign-currency mortgage loans into forint loans. The amount of foreign currency loans at that point had declined but was still worth approximately 3.6 trillion HUF, equal to 10 percent of GDP. The Hungarian National Bank made available to the financial institutions the necessary amount of foreign currency, and the forex rates were set according to market exchange rates.

New consumer-friendly regulation to secure future lending

In addition to these measures to eliminate the foreign currency loans, the Hungarian Parliament also adopted a law on fair banking in November 2014 to give greater protection to consumers. The law established strict conditions limiting unilateral changes to lending interest rates and fees – changes that the banks had previously enjoyed wide latitude to make – and also requires banks to provide more detailed information to clients before loan contracts are signed. The new rules guarantee greater predictability and security for consumers and prevents banks from saddling borrowers with hidden costs. According to this law, contract terms such as loan interest, charges and fees are allowed to be modified only once in a three-year period and under the supervision of the Central Bank.

As a result of the Orbán Government’s timely series of policy actions taken since 2010, the Hungarian market escaped the potential catastrophe that could have resulted from the Swiss National Bank’s decision in 2015 to lift the exchange rate cap. By the beginning of 2016, the total stock of such household loans had fallen to only 1 percent, effectively eliminating the economy’s exposure and vulnerability to the risk of foreign exchange loans.